CHAPTER 2: A CONSUMERS ECONOMIC CIRCUMSTANCES Flashcards
(21 cards)
Constraints
Income, assets, skills, time , future income (from borrowing)
Budget constraint
The boundary of the choice set showing the max combinations of goods a consumer can buy without exceeding their budget
A Choice Set
All the combinations of goods + services a consumer can afford given their income and the prices of those goods
Decisions leading to currently available income are..
Inn the past
Exogenous income
Income consumer takes as given
Bundles are represented as points in 2 dimensions.
(X1, x2) Is an element of r^2+
Budget constraint line
Set of bundles that is affordable and leaves no unspent income.
Budget line equation:
P1x1 + p2x2 = I
X2 = I / p2 - P1/P2 x1
Increase in exogenous income does what to the choice set?
Expands
When income changes what happened to opportunity cost?
What about price effecting the slope?
Remains the same, the slope moves outwards (changing the intercept), but the actual slope remains the same.
Price change does effect the slope.
Inwardsly kindled budget sets are (convex or non-convex)
Non-convex
Non convex
A set of points where we can find any two points such that a portion of the line lies outside the set.
Outwardly kinked means
Convex.
Any set of points where the connecting line is fully contained in the set.
Composite good
We cannot graph a budget constraint of more that 3 goods.
All goods except one are called composite goods.
Composite goods budget line equation
P1x1 + x2 = I
X2 = I - p1x1
Endowments
Choice sets can come from consumers ability to sell something they already own.
Is the income of an endowment endogenous or exogenous
Endogenous
When budget lines aris from endowments, a price change causes a
Rotation of the budget lie through the endowment bundle.
